Finding your property investment’s inner strength

As the property market takes a breather and prices that were booming earlier this year start to cool off, it’s important for investors to remember one of the critical rules when it comes to buying property; location is key.

When we enter the slower phase of a property cycle, as seems to be occurring now, the importance of location becomes very apparent.

As most seasoned investors know, part of growing a successful portfolio is purchasing in tried and tested areas that consistently provide strong, above average, long term capital growth.

In our experience, the most proven suburbs are always found around the inner areas of Australia’s major capital cities and bayside locations. You don’t have to take my word for it; just consider data recently released by the Real Estate Institute of Victoria that clearly shows inner Melbourne house prices have significantly outperformed their more distant counterparts over the last decade.

The REIV figures demonstrate that inner city property owners have done considerably better than those in the middle and outer rings, as house prices within 10 kilometres of Melbourne CBD have risen by 88% since 2005, compared with 80% for suburbs within a 10 to 20 km radius of the CBD and only 53% for outlying areas.

So why does this trend continue? Quite simply, it is the result of supply and demand and the perpetual imbalance between these two factors that exists around our capital cities.

Demand for inner city living continues to grow, as people seek to live closer to their work, good public transport links and shopping and entertainment hubs; essentially, sought after inner city suburbs that offer a modern lifestyle for young singles and couples just keep gaining popularity.

However, land in these areas is simply unavailable; they’re not making anymore and most of the existing land is already built out. In other words, even though demand continues to escalate from a booming population, the supply of dwellings around the inner ring of Melbourne’s CBD is very limited. It is this imbalance that causes property prices to rise.

Conversely, in the outer suburbs that have shown the least growth over the last five years, supply generally outweighs demand. These areas are traditionally not as sought after due to their distance from employment and infrastructure and there’s often large tracts of developable land still available; it’s the combination of these factors that tends to keep a lid on property prices in Melbourne’s outer corridors.

The REIV’s communications manager Robert Larocca says quality of housing doesn’t seem as important when it comes to inner city property values; rather it is the mere fact of close proximity to the CBD.

He says you only have to consider the two markedly different inner city suburbs of Camberwell and Footscray. In the prestigious neighbourhood of Camberwell, the median house price was just over $1.5 million in the March quarter this year, while Footscray’s median house price was a more affordable $563,500. Yet in both neighbourhoods, prices have risen by 201% in the last decade.

Leading the field when it comes to house price growth in the inner city since 2000 was South Yarra, with a 314% increase, followed by Malvern (303%), Hawthorn East (261%) and rounding off the top five were Kew and Prahran on an equal 257%. It’s interesting to note that all of these areas are in the South Eastern or Eastern corridors of Melbourne’s inner city.

For buyers agents like us, this data simply lends weight to what we tell our clients every day – inner city property will always provide the best returns on your investment, without question.

This is particularly the case when the market slows down and affordability becomes an issue due to interest rate rises, as we’ve witnessed over the past year or so. In these times young families, who predominantly live in the outer suburbs, feel the pinch of mortgage stress and as a result, local property markets come to a grinding halt.

The good news for investors at this more stable point in our property cycle is that there are some exciting opportunities currently presenting themselves in these prime inner city areas.

In fact we recently helped clients purchase an absolute inner city gem, only 7 kilometres from Melbourne’s CBD in a sought after bayside suburb. When we found the property for them, it was a spacious, but untouched 2 bedroom apartment.

We managed to secure the apartment prior to auction for $500,000 in February and on settlement in April, our clients undertook a complete refurbishment at a cost of $50,000. This included converting the dining room into a third bedroom, adding considerable value and enhancing its rental prospects greatly. In fact, the property was let in June this year for $470 per week; a significant improvement on the $270 per week rental income it was making in late 2007.

Further adding to the good fortune of our clients, is the fact that other comparable apartments in the same street have sold in the vicinity of $560,000 to $700,000 since they made their purchase in February. The current estimated value of the apartment in question is in excess of $600,000, representing an immediate potential capital gain of over $50,000 after renovations.

Enter your Email:

Your information will not be shared with any 3rd party. That's a promise.

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

Property investor resources

Guide to getting rich

Invested in property?

PropertyUpdate.com.au is Australia's leading property investment wealth creation website with tips, advice and strategies from leading real estate investment experts. Featuring topics like property investment, property development (helping you understand the process), negative gearing and finance (so you can borrow more from the banks), property tax (allowing you to structure for legal tax deductions and asset protections), negotiation, property management (assisting landlords and tenants understand their right responsibilities), commercial property (for experienced property investment individuals), personal development and the psychology of property investment success.